ACCOUNTANTS’ LIABILITY – LIQUIDATOR’S DUTY TO TAKE REASONABLE CARE AS COMPANY OFFICER

Legal Directions

Asden Developments Pty Ltd (in liq) v Dinoris [2017] FCAFC 117

Introduction

In Asden Developments Pty Ltd (in liq) v Dinoris [2017] FCAFC 117, the Full Court of the Federal Court recently held that a liquidator had breached the statutory duty he owed under the officers’ duties provisions of the Corporations Act 2001 (Cth)
(the Act)  in failing to take further steps to seek to recover company funds appropriated by a director, but that the breach had not caused loss so compensation was not payable.

Background

In this case, the sole director and shareholder of Asden Developments Pty Ltd (Asden) had withdrawn money from Asden’s bank account the day before it was placed into liquidation. The liquidator became aware of this the day after being appointed and wrote to the director requesting any money to which Asden was entitled. While the liquidator thought there was a real possibility the director had removed funds in breach of her duty to the company, he decided not to telephone the director as he considered that any such attempt would prove fruitless. The liquidator instead decided to seek funding to pursue a public examination which never eventuated. Later, the director would give evidence that if she had been contacted by the liquidator, she would have repaid the money.

Following the appointment of a new liquidator, Asden instituted proceedings against the former liquidator for breach of section 180 and compensation under section 1317H of the Act. Section 180 imposes a civil obligation of care and diligence on directors or other officers of a corporation, subject to a business judgment exception. When a company is being wound up, the liquidator becomes an officer of the company for the purposes of the Act, in line with the extended definition of ‘officer’.

At first instance, the trial judge held that the liquidator had breached section 180, finding that his failure to telephone or contact the director showed a lack of care and diligence expected of a reasonably competent liquidator. However, the director’s evidence that she would have paid the money back was rejected, so Asden could not establish that it had suffered any loss.

Both Asden and the liquidator appealed to the Full Court.

Decision

All three judges of the Full Court held that there was no error in the trial judge’s conclusion, finding:

  • While the Full Court approved of the trial judge’s decision to reject the director’s evidence, this did not assist the liquidator in proving that he should not have contacted her, as the question of breach of section 180 must be considered without the benefit of hindsight.
  • The liquidator’s decision not to contact the director was held to be a breach of the duty to exercise reasonable care and diligence, not just a mere error of judgment. The Full Court noted that two relevant elements to this inquiry are the particular circumstances of the company in question, and the particular responsibilities of a liquidator. In this case, the director was the sole director and shareholder of the company and the liquidator was on notice that funds had been inappropriately withdrawn by her. It therefore did not matter that such an inquiry might be fruitless, as it was nevertheless an obvious line of inquiry. Further, it is ‘well recognised’ that liquidators who are appointed and paid to exercise particular professional duties must meet high standards of skill and competence.
  • The Full Court held that in this case, the liquidator’s actions were not discretionary decisions on commercial matters, and therefore no business judgment exception applied.

However, as the Full Court considered the trial judge’s findings on causation was open on the evidence, no loss could be proven. Compensation was therefore not payable under section 1317H of the Act and costs were awarded against Asden.

Comment

While the liquidator was spared compensation and costs on the particular facts of this case, this decision provides a salient reminder of the broad scope of officers’ duties and their application to liquidators who are often placed in a difficult position if they have limited funds. It remains the case that liquidators are potentially exposed and have to be careful when taking steps to collect the assets of a company.

Authored by Anthony Scott, Partner and Jonathan Markowitz, Graduate at Law, Melbourne

 


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